The Realities of Debt Consolidation, Management and Settlement

Reality Check.

The last few years have been financially challenging for many, including our neighbors and ourselves. We’ve navigated the fallout of a pandemic with soaring inflation, rising interest rates and now the resumption of student loan payments, all of which have put a strain on our household finances. Amidst this, an overabundance of “solutions” is advertised on television and online, but what really lies beneath these offers?

I’m Dion Williams, President & CEO of Piedmont Advantage Credit Union. This article delves into the realities of debt consolidation, debt management and debt settlement, uncovering their advantages, drawbacks and potential pitfalls.

Debt Consolidation

Debt consolidation is a straightforward approach to managing high-interest debt. Imagine you have four credit cards with a total balance of $25,000 and interest rates around 20%. By consolidating these into a single loan, you could potentially enjoy a lower monthly payment and a reduced interest rate compared to the original terms. This method simplifies your payments and sets a clear timeline for debt elimination, unlike revolving credit card balances that can grow.

However, the effectiveness of debt consolidation depends greatly on personal discipline. For instance, if consolidating your debt saves you $150 monthly, the way you use this extra money is crucial. There’s a risk of accruing new balances on your cards, which could lead to a situation where you’re paying off both the consolidation loan and new credit card debts.

If you choose debt consolidation, it’s wise to close your paid-off accounts and keep only one card for emergencies to prevent falling back into debt. Remember, obtaining another consolidation loan will become difficult if your finances deteriorate.

Debt Management

A debt management plan involves collaborating with a third party that negotiates lower payments and interest rates with your creditors. The goal is to become debt-free within five years by consolidating your payments into one monthly transaction to the debt management company, which then pays your creditors. However, this option isn't available for secured debts, like auto or home loans, and may affect your credit score since creditors usually close your accounts as part of the agreement.

Debt management services include fees, typically taken from your monthly payment or partially subsidized by creditors. Crafting a budget and planning independently is ideal, but if your financial situation is severe, debt management is a preferable alternative to bankruptcy. Some debt management programs do partner with credit unions.

Debt Settlement

Debt settlement companies also negotiate with creditors but differ from debt management firms as they may advise you to stop making payments directly to creditors. Instead, you make payments to the settlement company, which holds the funds until a negotiation can be reached. This strategy can negatively impact your credit due to delayed payments, which might incur additional fees or legal issues.

The goal is similar to debt management, which is to eliminate your debt in less than five years. However, the approach can lead to significant short-term credit damage, which needs consideration if you plan to apply for credit in the near future. While debt settlement can be an alternative to bankruptcy, it carries potential risks and impacts.

Common Theme

The common theme across debt consolidation, management and settlement is the importance of budgeting. Budgeting is not fun. It requires tough choices, discipline and difficult conversations, but resources are available with your financial institution. At Piedmont Advantage, our certified financial counselors are credentialed to help you develop and manage your budget and make informed decisions about debt solutions, aiming to improve your financial stability without declaring bankruptcy, a last resort debt solution.